Profit slowdown casts shadow over dividends

MUMBAI: For investors injured in the stock market crash, this could be rubbing salt into their wounds: With earnings growth slowing down, companies are getting stingy with dividends, saving capital for tough times. The smaller dividend cheques of 2007-08 attest to this.

Many companies, including Kirloskar Oil Engines, EID Parry, Aztecsoft, Polaris Software and SRF, have trimmed dividend after posting a sharp decline in net profit or making losses.

Kirloskar Oil Engines has halved its payout to 100% in FY08 from a year ago. The company posted a 33% drop in net profit to Rs 119 crore, while sales grew 14% to Rs 2,212 crore during the year. Its equity capital, however, doubled to Rs 38.8 crore, which also seems to have influenced the company���s decision to slash dividend.

From a high of Rs 184 on January 1, shares of Kirloskar Oil Engines had fallen to Rs 96 on March 24. The stock closed 3.8% up at Rs 110.7 on the BSE on Wednesday.

Similarly, EID Parry has pared its dividend cheque from 70% to 25%. It shareholders, however, can take solace from the fact that the company is offering some returns despite reporting a loss of Rs 17 crore. In the absence of any profit, the company would have to dip into its reserves to pay the dividend, according to analysts. On Wednesday, the stock was up 0.5% at Rs 222.7, recording a gain of 27% in last one month.

While most analysts cite poor performance and higher equity base as reasons for lower payouts, some also point to expansion and modernisation plans.

���If a company has lined up capex and plans to finance the same through internal accruals, then it would try to retain a large part of profit by declaring a lower dividends,��� said Asit C Mehta Investment Intermediates vice-president (research) Bhavesh Shah.

Huge capital expenditure is a major reason why companies in manufacturing have not been as liberal as their service sector peers (for instance IT) in dividend payment, according to analysts. It is, however, found that some IT companies have been adopting a conservative approach with payouts even though they have been making incremental profits.

For instance, 3i Infotech, declared a dividend of 15% for FY08, compared to 20% previous year. This was despite an impressive 56% growth in the company���s net profit during the period. The company���s equity capital has jumped from Rs 56.3 crore to Rs 130.5 crore on account of a 1:1 bonus and allotment of shares under an Esop scheme. This, say analysts, could be the reason why the company has decided to pay less dividend.